Safe havens in play as oil falls, China seeks stable yuan

[January 12, 2016]  By Patrick Graham

LONDON (Reuters) - Major currency markets flattened out on Tuesday after a rebound for shares and other riskier assets from the latest round of shocks due to falling oil prices and worries over China.

Of the big four developed world currencies, sterling was the standout, falling almost 1 percent after poor British manufacturing numbers while the dollar, euro and yen were broadly unchanged.

Attention remained fixed on the gyrations of China's yuan and a fall in oil prices to $30 a barrel, a morning recovery for crude helping wipe away initial falls for the Norwegian crown and Canadian, Australian and New Zealand dollars.

Yuan offshore rates <CNH=D3> steadied, but their convergence with the officially controlled onshore market <CNY=> was driven by official moves to push implied overnight interest rates in Hong Kong as high as 94 percent.

Fund investors, bankers and corporate sellers have rounded on the yuan since late December and there is little sign of negative views on the currency abating.

Chris Morrison, head of strategy and a portfolio manager with London-based hedge fund Omni, has been betting against the yuan since the start of 2014.

"The interest in this trade has just risen exponentially. I have received 50 emails per day on the RMB (yuan) in the last week," he said.

"We saw that as a short-term reason to reduce our position size. There will be a consolidation...But we remain very committed to the trade."

Several banks have cut their forecasts for the yuan to around 7 per dollar by the end of this year, compared with 6.58 on Tuesday.

"It's rather contingent on the dollar staying big but a 5-10 percent depreciation per year for two or three years seems entirely possible," said Richard Benson, co-head of portfolio investment with currency managers Millennium Global in London.

Sterling hit a 5-1/2-year low against the dollar after data showed British industrial output suffered its sharpest fall since early 2013 in November, adding to doubts about the strength of the country's economic recovery.

JP Morgan was the latest major bank to push back its forecast for a first rise in UK interest rates, until the end of this year.

"Recent disappointments in the pay data and the drop in oil prices had already put our call for the MPC to raise rates in May at risk," analyst Malcolm Barr said in a note to clients.

"The weakness in this IP report is the straw that breaks the camel's back. We hence push our forecast for the first hike back by 6 months to November 2016."

By midday in London, the dollar was around 0.1 percent higher against both the euro and yen at 117.85 yen <JPY=> and $1.0843 <EUR=> respectively.

(editing by John Stonestreet)

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